Building savings is essential for everyone, but it can seem overwhelming when you don’t have a ton of money to set aside. Marguerita Cheng, CEO of Blue Ocean Global Wealth, acknowledges that even though experts recommend having three to six months of expenses set aside for emergencies, establishing a fully funded savings account can be daunting. But that doesn’t mean you should give up on savings altogether.
For somebody who’s starting and can’t save that much, maybe you only save $25 or $50 a [pay]check. The most important thing, rather than focus on the amount, is to start the [savings] habit.
Marguerita Cheng, CFP
When it comes to savings, every little bit counts. And where you store your money can make a real difference in how fast it grows. Read to learn more about your savings options and how to determine the best fit for your situation.
The best places to stash your savings to maximize your interest growth
If you want to maximize your savings, consider the following options.
High-yield savings accounts
A high-yield savings account is an interest-earning account with a competitive annual percentage yield, or APY, that’s multiple times the national average rate. The best rates available on high-yield savings accounts are as high as 5.55% APY, while the national average is only 0.46%. High-yield savings accounts are often offered by online banks or credit unions.
A high-yield savings account is a secure option because it’s protected against bank failure for up to $250,000 per person, per institution if it’s offered by a bank insured by the Federal Deposit Insurance Corporation or a credit union insured by National Credit Union Administration.
Pros and cons of high-yield savings accounts
Pros
Higher rates than traditional accounts: High-yield savings accounts typically have higher APYs than traditional savings and checking accounts, which means your money will grow faster.
Flexible access: You can deposit or withdraw money when you need to without penalty, as long as you mind any monthly withdrawal limits.
Low or no minimum deposit requirements: You can open many high-yield savings accounts without depositing any money initially.
Cons
Variable rates: Savings account APYs are variable and can change without notice based on market conditions.
Limited or no physical branch access: High-yield savings accounts are often offered by online-only banks, so you’ll need to be comfortable managing your account digitally.
Transfer time: It can take one to three business days to transfer money from your savings to an external bank account -- which, for example, you may need to do if your account is held at an online bank that doesn’t offer ATM access.
Withdrawal limits and fees: Some banks limit your withdrawals to six per statement cycle before charging an excessive withdrawal fee.
Certificates of deposit
A certificate of deposit, or CD, earns a fixed interest rate for a set period, or term. Most CDs have terms from three months to five years. CD rates are often competitive with high-yield savings account rates, if not higher.
However, you must leave the money in the account until the term ends -- otherwise, you’ll pay an early withdrawal penalty, which can eat into your interest earnings. These penalties range from 90 to 365 days’ worth of interest, depending on the bank and the CD term. CDs are protected up to $250,000 per person, per institution if they’re issued by FDIC- or NCUA-insured financial institutions.
Pros and cons of CDs
Pros
Fixed rates: Your APY is locked in, so your interest earnings are guaranteed for the entire term, even if overall rates fall.
Competitive rates Banks often pay higher rates on CDs because you’re agreeing to keep your money in the account for a specific period.
Cons
Withdrawal penalties: Money withdrawn before the CD matures may incur an early withdrawal penalty that can reduce your earnings. However, some no-penalty CDs offer rates that are still considerably higher than you’ll find with a traditional savings account.
Minimum deposit requirements: Most CDs require a minimum balance to open. However, you can find several CDs that require an initial deposit as low as $500 or $1,000.
One-time deposit restrictions: Most CDs don’t allow you to deposit additional money once the account has been opened.
Money market accounts
A money market account, or MMA, combines checking account features -- such as check writing privileges and debit card access -- with the interest-bearing ability of a savings account. MMAs usually require a higher balance to earn interest and keep your account open, and you may only be able to make a limited number of monthly withdrawals. Like savings accounts and CDs, MMAs are insured by the FDIC or NCUA for up to $250,000 per person, per institution.
Pros and cons of money market accounts
Pros
Flexible access: Most banks provide debit card access and check-writing privileges with MMAs, making your money easily accessible.
Competitive rates: MMAs can offer competitive rates on your entire balance. Some MMAs have a tiered APY structure that pays the best rates on bigger balances.
Cons
Withdrawal restrictions: Some banks limit how many transfers and withdrawals you can make each month. Going over that limit incurs an excessive transaction fee.
Minimum balance requirements: MMAs typically require higher initial deposits and minimum balances than savings accounts, and you’ll incur fees for dipping below that minimum. It’s possible, however, to find an MMA with low or no minimum deposit and balance requirements.
Variable rates: MMA interest rates are generally variable, making your return less predictable. Rates can change at any time, decreasing your return if they drop.
Lower yields than other long-term bank products: MMAs earn higher interest than traditional savings accounts. However, you can earn bigger returns on long-term savings with CDs or other investment accounts.
Series I savings bond
Series I bonds are savings bonds whose rates are tied to the inflation rate. The rate for I bonds issued from May 1 to Oct. 31, 2024, is 4.28%. The interest rate for I bonds changes twice a year, in May and November, so you can lock in this rate for up to six months if you open one before Nov. 1, 2024.
Savings bonds are among the safest investments because the federal government backs them. But they’re not the best place to store your emergency fund. You must hold them for at least a year, and if you redeem them before five years, you’ll lose out on the previous three months of interest.
Pros and cons of series I bonds
Pros
Long-term stability: Since series I bonds are backed by the government and tied to inflation, the rate only changes twice a year. This makes your returns more predictable than with investments like savings accounts.
Inflation hedge: Inflation can erode your money’s purchasing power. Series I bonds are designed to protect your money from inflation.
Tax advantages: You won’t pay state taxes on the interest earned from series I bonds. And if you use your I bond earnings to pay for qualified higher education expenses, you may be exempt from paying federal taxes, too.
Cons
Variable returns: Inflation remains high, but when it does start to cool, I bond rates will go down. In contrast, if you open a CD when rates are high, your earnings will stay the same for the entire term.
Holding period requirements: You’ll pay a penalty of three months’ interest for accessing money in a savings bond you’ve held for less than five years.
Which savings account is best for you?
When considering the benefits and drawbacks of each savings option, it’s important to assess your goals and needs. Ask yourself the following questions when choosing an account:
- When do you need the money? If you’re building an emergency fund, a high-yield savings or money market account will allow you to access your money when you need it without penalty. If you have a fixed savings timeline, like saving for a vacation in a year, a CD can help in two ways. The early withdrawal penalty may discourage you from using the funds unnecessarily, and you can generally earn a higher yield than many savings or money market accounts.
- How do you plan to access your money? While online-only banks and credit unions often offer the best yields on savings accounts, you may want to consider a bank with local branches if in-person customer service is a priority. Some online banks don’t offer ATM access or accept cash deposits. Hybrids -- such as Capital One -- offer competitive rates, the convenience of online banking and physical branches.
- How much do you have to deposit? You don’t need a lot of money to open a savings account -- many banks and credit unions don’t require an initial deposit. But make sure the bank doesn’t charge a monthly fee if your balance dips below a certain level. Paying a monthly fee will work against your efforts to build savings.
- What savings tools does the bank offer? Banks such as Ally offer digital savings tools, such as savings buckets or round-ups, that can help you reach your savings goals.
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When it comes to savings, every penny counts
The key to success in building your savings fund is getting started. Once you’ve done that, understanding what savings account will best support your goals is vital. Bola Sokunbi, CEO of Clever Girl Finance and a CNET Expert Review Board member, recommends starting your new savings journey with a high-yield savings account or CD, depending on your goals. “If my savings fund is tied to a short-term goal -- five years or less -- I’d want it to be easily accessible,” she said.
Make sure you understand the benefits and drawbacks of each type of savings account discussed above. Selecting the best fit will add extra momentum to help you accomplish your savings goals.
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